Thank heavens for loans. They are convenient financial products that have helped people from all economic statuses to obtain something they want, but couldn’t afford. Loans can do everything from fund your dream home or car to tide you over when unexpected emergencies arise. When used properly, they can be beneficial and prevent a lot of stress.
However, when borrowed irresponsibly, they can be your worst nightmare. If you’re thinking about applying for a loan, knowing when to use one and the importance of doing so responsibly can save you a lot of chaos down the road.
Common Reasons to Apply for a Loan
Though loans are commonly used to cover the cost of things your personal income and savings won’t afford, not every circumstance requires you to apply for a loan. Some of the most common reasons for applying include:
Purchasing Big Ticket Items (that you can afford monthly payments on) – Big-ticket items like cars and houses can cost tens of thousands of dollars and generally isn’t sitting in someone’s bank account. Mortgages or auto loans are essentially applied for to cover the initial purchase, but should only be applied for if you can afford the monthly payments.
Handling Financial Emergencies (short-term) – The car breaks down, the plumbing starts leaking, or the energy bill surges without notice. These are all financial jams that people have found themselves in and they look to short-term cash advance loans to tide them over. While great for holding you over until your next paycheck, they are not ideal for long-term issues like unemployment or dealing with large amounts of debt.
Funding School or a Business – Another common reason to apply for a loan is to complete higher education courses or to start a business venture as they can both require initial investments in the thousands.
Consequences of Not Being Responsible
Though it’s highly unlikely that you’ll end up in jail because of an unpaid debt there are still a lot of consequences that could wreak havoc on your life. Failure to repay the loan in a timely fashion could result in any combination of the following:
Late Fees – Lenders have timeframes for which they’d like their money returned to them. This was agreed upon by you when you signed the loan agreement. Failure to pay the balance on the due date can result in a late fee that is separate from the principal loan payment and interest. This obviously eats away at your budget and prolongs your efforts to pay the loan off in time.
Insufficient Fund Fees – If your loan repayments have been attached to your checking or savings account for automatic debit, but the funds aren’t available for withdrawal, you can most certainly expect your bank to charge you as well. This fee can be multiplied as some lenders will try and debit the payment more than once before reaching out to you.
Negative Reporting to Credit Bureaus – If you took out a loan with the hopes of rebuilding your credit score, but default on the payments, you can expect to see this negative pattern reflected on your credit history. Lenders report to one or more of the major credit bureaus on a monthly basis and if your account is not settled by the time their report date pops up, you’ll have to wait another 30 days to see improvement.
Legal Action – If a loan is large enough and left outstanding for too long adverse legal action can take place. Lenders often reserve the right to do things like foreclose on a property, repossess a car, request wage or income tax garnishment, and more.
Ruined Reputation – Perhaps one of the longest consequences of failing to be responsible with a loan is a ruined reputation. Not only does your poor effort to repay prevent you from borrowing from the current lender in the future, but it can also ruin your ability to borrow from any financial institution for the next 7 to 10 years.
At the end of the day, loans come in handy. They help you to afford things that would otherwise take you a lifetime to save up for. If you’re going to reap the benefits that lenders are willing to offer you, then it is necessary to be a responsible borrower and repay the loan as quickly as possible. Whether you fall into a surplus of cash, pay it off bit by bit, or reach out to the lender for more affordable options, the sooner you get it paid off, the better it is for you and your credit status.